Will a Retirement Income Gap Ruin Your Future? Take Control With This Guide

Would you face a retirement income gap if you wanted to (or needed to) retire early? If you originate from the UK or currently live there, are you one of the millions of people relying on getting the State Pension before you can retire? If you can't be certain that you won't want to retire before you arrive at State Pension age, then you could be at risk of suffering from what's being termed the "pre-State Pension gap". This is, essentially, the amount of money you need to support yourself in the years between retiring and reaching the State Pension age. This, and any retirement income gap, can be disastrous for your retirement plans. Find out how to calculate your income gap with this guide.

What’s the latest with the UK State Pension age?

As the Government looks set to increase the age at which you can claim the State Pension to 68 —and possibly beyond—the pre-State Pension gap is becoming more of a problem for would-be retirees. They’ve been steadily increasing the State Pension age. First, by equalising the State Pension age for men and women to 65. Then a rise from 65 to 66 between 2024 and 2026, and age 67 between 2034 and 2036. Now, we’re looking at an increase to 68 in 2044-2046. And they’re unlikely to have a change of heart and stop there.


Why is the rise in State Pension age a problem if we’re living longer?

Despite the UK government’s ideas, research shows that the ideal retirement age for most people is around aged 60. This is because ‘life expectancy’ and ‘healthy life expectancy” are two completely separate things.

The average life expectancy in the UK is just shy of 81 – but most people can only expect to live until age 63 without developing some kind of health concern that could limit their ability to work.

Nevertheless, the Government simply won’t can’t absorb the extra cost of all the extra retirement years – irrespective of the fact that medical science is able to keep people alive though not necessarily young.

People are already working longer than ever before – with an average retirement age of 65. But, just because people are working longer doesn’t mean they necessarily want to or are enjoying a good or fair quality of life as a result.

It seems clear to us that many may wish to retire – or should retire – at an earlier age. But the fact is many people are not financially set up to retire before reaching the state pension age. We want to change this.


Do you have enough money to retire before the State Pension kicks in?

If you do – great. (But is there really such a thing as enough money?)

If you aren’t sure, or you are pretty certain the answer’s no, then you may well fall victim to the pre-State Pension gap.

The extent of the gap – if any – will look different for every household. But, as a crude example, the Pensions and Lifetime Savings Association have come up with a figure. They claim the extra income that someone retiring at the optimum age of 60 would need to make it to 68 before getting the state pension is expected to be a staggering £136,000. And that’s only allowing for a modest income of £17,000 a year. With the way the cost of living is increasing, that doesn’t seem realistic.

pre state pension gap

How to calculate your personal state pension gap

Here are three steps you can take to figure out how much money you would need to cover the pre-State-Pension gap – and any other income gaps you might face upon retirement.

1. First – estimate how much annual income you’ll need (or want) to have for each year of retirement.

Many people tend to believe they’ll spend a larger proportion of their pot earlier on in their retirement and less as they get into true old age. But, this isn’t always the case. Not only do income needs not necessarily reduce as one gets older, but there’s also another even less predictable variable… Inflation.

2. Second – think about when you’d like to retire.

However, bear in mind that life is what happens while we’re busy making plans. You only have conjecture to work with. So make it a reasonable middle ground rather than a best or worst-case scenario.

3. Next – work out how much you can expect to earn from the State Pension annually.

In 2023-2024 the new state pension is £10,600.20 per year. You only qualify for this if you have 35 years of National Insurance contributions. You can use this Government’s resource to check out your State Pension forecast.

4. Then – multiply this figure by the number of years between your ideal retirement age and the State Pension age.

Now you’ve determined how much income you’ll need to cover the lack of State Pension for this period. But, of course, this isn’t the full picture for most people in terms of covering what you really need in your pension pot…

5. Time to consider what you have in your pension pot.

Discover what you have currently then use that figure to work out what your projected retirement pot is. There are loads of calculators that can help – we like this one from Money Helper. This tells you how much you’re likely to have available at the time of your desired retirement age.

6. Bear in mind you’ll still need some private pension to last you when you’ve reached State Pension age.

So, take the figure from point 1 (what you need/want to live on each year) and multiply it by the difference between average life expectancy and your retirement age in point 2. We actually recommend you chuck a number of years onto that figure for good measure because you could live far longer than average – which wouldn’t be fun without income.

retirement planning

7. To this figure, add the figure from point 4 (your pre-state pension gap).

This is how much money you’ll need in your retirement fund to comfortably cover your pre-state-pension gap and the full length of your retirement.

8. Now for the scary bit

Take your State Pension projection from point 3, and work out how much you can expect to get between the State Pension age and when you predict you may expire. Add this figure to your projections from the private pension calculator. Now you have a rough estimate of your total retirement income. How does this figure look against the figure from point 5?


So now you know – what kind of pension gap are you looking at?

Depending on the difference between those two figures, you could be looking at a comfortable retirement and the ability to stop working when you want/need to. Or, you could be panicking.

First, don’t panic. The good news is that you can take steps to avoid the pre-State Pension gap, and any retirement income gap for that matter – but it will require a lot of careful planning.

The very first thing to bear in mind is that none of these figures are set in stone.


How pension drawdown can impact your total retirement fund

You should also bear in mind that your eventual income could vary massively depending on whether you opt for buying an annuity or take flexible pension drawdown options. Using drawdown means your pension can remain invested in the stock market, giving it a chance to continue to grow.

Depending on the growth you get, you might find you can take more income than you originally planned through the years. Investment growth while you’re still contributing can also make a big difference to whether you can retire earlier than the State Pension age.

If you opt for an annuity, this can give more certainty of income and depending on rates as well as how long you live, this could result in a good return on your pension pot. However, buying an annuity means you’d then miss out on future investment growth. This is why it can make sense to start retirement using drawdown before taking an annuity later on. We have a whole blog on this subject that you can read over here.


What can you do about a retirement income gap?

retirement income gap

Regardless of where you live and whether you’re affected by the UK Pension Age increases, a retirement income gap is something you should proactively avoid.

If you are on the panicky end of the spectrum, having a chat with a financial adviser is a really good place to start to work out how you can bridge any retirement income gap. Retirement planning doesn’t mean you have to rob the present to pay for the future. Sometimes all it takes to ensure you’re on track is some clever adjustments and tweaks. One’s you’ll barely notice today, but could make a huge difference in retirement.

Don’t fall foul of the pre-State-Pension retirement gap. Give us a call to discuss your retirement planning and start feeling better about those numbers.